Two ways to ride the rails
"We rate both Burlington Northern Santa Fe (NYSE: BNI) and Canadian National Railway (NYSE: CNI) as buys," says analyst Tom Slee.
The contributing editor to Gordon Pape's Internet Wealth Builder suggetss, "Burlington Northern remains my number one pick in the sector but CN is excellent value at these levels." Here's his bullish review.
"Burlington Northern Santa Fe had a relatively good second quarter, posting earnings of $1.18 a share. This is down from $1.34 in 2008 but beat the consensus estimate of $1.01.
"Year-over-year revenues fell 26% although this was offset by a 33% reduction in costs as a result of tighter controls and lower energy prices.
"The outlook for U.S. railways remains clouded, primarily because the American economy continues to sputter. On the other hand, volumes have stabilized in recent weeks and should improve during the second half as we move into the harvest and winter heating seasons.
"Further out, industry analysts are forecasting an almost 4% increase in car loadings next year and that is going to give lift BNI's earnings. This is now a much leaner company.
"We always knew that Burlington, along with all the other railroads, would be hurt by the economic collapse and we are now seeing the damage in the numbers.
"The good thing, though, is that the company remains profitable and is expected to earn about $5.25 a share this year followed by $6.75 or more in 2010.
"Operating margins remain respectable and should improve rapidly as volumes increase and there is better asset utilization. I continue to like BNI because of its long-haul markets, tight management, and a healthy cash flow that amounted to $888 million in the second quarter.
"Also, according to Union Pacific CEO Jim Young, the railways have not yet felt a boost from federal stimulus packages. This should give Burlington a lift.
"Perhaps most important, the stock has been a laggard during the recent market recovery. It now has a lot of upside potential. Our upside target is $93.
"Canadian National is a barometer of the Canadian economy. You could say that it has its finger on the country's pulse. There does seem to be some light at the end of the tunnel.
"Rising shipments in basic resources, chemicals, and particularly consumer goods bode well for a whole array of companies and business generally.
"As far as CNR itself is concerned, the company has performed well during the downturn, reporting respectable earnings mainly by trimming overheads.
"In addition, management has been quietly improving its operating structure. For instance, profitability in the railway business is to a large extent a function of length of haul.
"The further freight moves, the more money the carrier makes. So CN has been dramatically increasing its average length of haul and at the same time eliminating short-haul traffic.
"As a result, while the company's car loadings are down 24% this year, revenue ton miles are off only 14%. This sort of streamlining is going to boost earnings as we move into the recovery.
"Moreover, CEO Hunter Harrison reported that there has been a sharp improvement in business since May. He looks forward to a much better second half.
"Barring a second North American economic collapse, CN Rail should make about $3.40 a share this year, followed by as much as $4 or more in 2010.
"As a result, I expect the stock to move up over the next few months to reflect this growth, especially if we see a good third quarter. CN Railway is a buy with a target of $62."
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